Summary of New Industrial Policy, 1991 – Objectivities and Changes

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The industrial policies pursued till 1990 enabled India to develop a vast and a diversified industrial structure. India” attained self-sufficiency in a wide range of consumer goods. But the industrial growth was not rapid enough to generate sufficient employment, to reduce regional disparities and to alleviate poverty.

It was felt that government controls and regulations had put shackles on the growth of different segments of Indian Industry. Lack of adequate competition resulted in inadequate emphasis on the reduction of costs, up-gradation of technology and improvement of quality standards.

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It is to reorient and accelerate industrial development with emphasis on the productivity, growth and quality improvement to achieve international competitiveness that the Industrial Policy of 1991 was announced.

The industrial Policy Statement of 1991 stated that “the Government will continue to pursue a sound policy framework encompassing encouragement of entrepreneurship, development of indigenous technology through investment in research and development, bringing in new technology, dismantling of the regulatory system, development of the capital markets and increased competitiveness for the benefit of common man”. It further added that “the spread of industrialisation to backward areas of the country will be actively promoted through appropriate incentives, institutions and infrastructure investments”.

Objectives:

The principal objectives of new industrial policy were identified as follows:

i. To consolidate the strength gained during the four decades of economic planning over 1951-91;

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ii. To correct the distortions (or weaknesses) that had crept into the industrial structure (i.e. one of low productivity and high cost production);

iii. To improve and maintain sustained growth in industrial productivity with gainful employment creation; and

iv. To attain international competitiveness.

Policy Changes:

Important changes in the NIP 1991, including the subsequent changes, can be briefly stated as follows:

Industrial Licensing Policy:

Industrial licensing is the most important instrument, which has been used by the Government for directing allocation of resources between industries and region.

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Following changes are introduced in Industrial Licensing:

i. All areas of industrial activity excluding areas of security and strategic importance are thrown open to private investments.

ii. Industrial licensing has been abolished for all industries including those (a) which either strategic and environmental concerns dominate or the import content is exceptionally high (Annexure II) and (b) which are reserved (836 items, reduced to 749 by 2001- 02) for small industry manufacturing.

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iii. Industrial licensing is not needed in location other than cities having a population of more than one million, as per the 1991 census.

iv. Industrial licensing is not required not only for new units but also for new products, as also substantial expansion and change of the location for existing units.

v. Phased Manufacturing Programmes (PMP) have been abolished for all new industries and subsequently for all industrial projects. Under a PMP, a concerned enterprise has to progressively replace imported materials, parts, and components with materials, parts and components produced in house or by other Indian firms. The PMPs accompanied industrial licences in a wide range of industries involving assembly of parts and components (notably the vehicle, machinery and electronics industries) prior to IP, 1991.

vi. Re-endorsement scheme is applicable only (a) for industries where licensing is compulsory and (b) within cities having a population of more than one million, for all those industries. Re-endorsement scheme was introduced in 1982. As per the scheme, all those industrial units, which had utilised 94 per cent of the licenced capacity over the previous five years, were allowed to expand their production by one-third thereof, without licence. In 1986, the scheme was further liberalised by reducing the cut-off limit to 80 per cent capacity utilisation.

vii. All industrial units, which have obtained licence for an item covered under Annexure II of IP 1991 prior to July 25,1991, have to obtain Carry on Business (C.O.B.) licence.

viii. All entrepreneurs, who initiate new industrial units and indulge in substantial expansions in delicenced industries, are required to file Industrial Entrepreneurs Memorandum (IEM). IEM has to be obtained from and submitted (6 copies) to Secretariat of Industrial Approvals (SIA) in the department of Industrial Policy and Promotion, Ministry if Industry as per the Industries Development and Regulation (IDR) Act 1951, along with a crossed demand draft for Rs1000/-.

ix. For licensing, application has to be obtained from and submitted to (with 8 spare copies) the Secretariat of Industrial Approvals under IDR Act, 1951 along with a crossed demand draft of Rs 2500/-.

x. All the industrial undertakings are required to submit monthly production returns to concerned technical authorities (e.g. Textile Commissioner, etc.) and a copy to concerned- administrative ministry or department.

xi. An Investment Promotion and Project Monitoring Cell is set up in the Department of Industrial Policy and Promotion, Ministry of Industry to provide information to entrepreneurs and to monitor progress of implementation of various projects.

Foreign Investment:

In regard to foreign investment, the principal features of the new policy are as follows:

i. Automatic approval is available to FDI in almost all sectors except for a few sensitive ones. Automatic approval is available for 50 per cent, 51 per cent, 74 percent and 100 per cent in specified industry groups.

ii. To provide access to international markets, majority foreign equity holding of upto 51 per cent will be allowed for trading companies primarily engaged in export activities.

iii. A Foreign Investment Promotion Board has been constituted to negotiate with a number of large international firms and approve direct foreign investment in select areas.

Foreign Technology Agreements:

The principal features of the policy on foreign technology agreements are:

i. Automatic permission will be given to foreign technology agreements in identified high priority industries up to a lump­sum payment of $2 million, 5 per cent royalty for domestic sales and 8 per cent for exports, subject to total payment of 8 per cent of sales over a 10 year period from the date of agreement or 7 years from commencement of production.

ii. In respect of industries other than those specifically mentioned, automatic permission will be given subject to the same guidelines as in cases where no foreign exchange is required for any payment.

Public Sector:

In regard to the public sector, the new industrial policy provides as follows:

i. Portfolio of public sector investments will be reviewed with a view to focus its investments in strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is being retained, there would be no bar for areas of exclusivity to be opened up to the private sector selectively. Similarly, the public sector will also be allowed entry in areas not reserved for it.

ii. Public enterprises which are chronically sick and which are unlikely to be turned around will be referred to the Board of Industrial and Finance Reconstruction for revival/rehabilitation schemes.

MRTP Act:

With regard to the MRTP Act, the new industrial policy provides as follows:

i. The MRTP Act has been amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings.

ii. Provisions relating to concentration of economic power, pre-entry restrictions with regard to prior approval of the central government for establishing a new undertaking, expanding an existing undertaking, amalgamations/mergers, etc. have been removed.

iii. Emphasis will be placed on controlling and regulating monopolistic, restrictive and unfair trade practices.